Question

Suppose a bank has $120 millions which has been invested to a risky asset with normally distributed return of annual mean =10% and annual standard deviation = 5%.Calculate the probabilities given below for the end of the year.

1. What is the probability that the loss will be less than equal to $10 mil?

2. What is the probability that loss is in between $15 mil and $20 mil?

3. What is the probability that the value of portfolio is greater than $140 mil?

4. What is the probability that the value of portfolio is less than equal to $120 mil?

Answer #1

1. Asset 1 has a beta of 1.2 and Asset 2 has a beta of 0.6.
Which of the following statements is correct?
A. Asset 1 is more volatile than Asset 2.
B. Asset 1 has a higher expected return than Asset 2.
C. In a regression with individual asset’s return as the
dependent variable and the market’s return as the independent
variable, the R-squared value is higher for Asset 1 than it is for
Asset 2.
D. All of...

Suppose the returns on Asset Y are normally distributed. The
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and the standard deviation of the returns was 23.5 percent. Based
on the historical record, use the cumulative normal probability
table (rounded to the nearest table value) in the appendix of the
text to determine the probability that in any given year you will
lose money by investing in common stock.
What is the probablility of a return...

Suppose the returns on an asset are normally distributed. The
average annual return for the asset over some period was 6.6
percent and the standard deviation of this asset for that period
was 9.0 percent.
Based on this information, what is the approximate probability
that your return on this asset will be less than -3.1 percent in a
given year?
What range of returns would you expect to see 95 percent of the
time?
What...

1. Below are the historical arithmetic average returns and
standard deviations for different asset classes.
Asset class
Mean return
Standard deviation
T-bills
0.035
0.031
Corporate bonds
0.063
0.084
Small company stocks
0.169
0.323
Large company stocks
0.121
0.202
Assume that the returns are normally distributed. Use Excel's
NORM.DIST() function to answer the following questions.
a. What is the probability that the return on corporate bonds
will be less than 4%?
b. What is the probability that the return on small...

Suppose the returns on an asset are normally distributed.
Suppose the historical average annual return for the asset was 5.6
percent and the standard deviation was 10.3 percent. What is the
probability that your return on this asset will be less than –2.5
percent in a given year? Use the NORMDIST function in Excel® to
answer this question.
What range of returns would you expect to see 95 percent of the
time?
What range would you expect to see 99...

The Capital Asset Pricing Model (CAPM) is a financial model that
assumes returns on a portfolio are normally distributed. Suppose a
portfolio has an average annual return of 10% (i.e. an average gain
of 10%) with a standard deviation of 31.5%. A return of 0% means
the value of the portfolio doesnt change, a negative return means
that the portfolio loses money, and a positive return means that
the portfolio gains money.
(a) What percent of years does this portfolio...

Suppose a bank has $100 million of assets to invest in either
risky or safe investments. The first option is to put all assets in
the safe investment, which will result in a 5% return and yield
$105 one year from now. A second option is to put all the assets in
the risky option, which will result in either a 50% return ($150
million) or a 40% loss ($60 million) with equal probability. If the
bank can pay to...

3.
a)
When adding a risky asset to a portfolio of many risky assets,
which property of the asset
is more important, its standard deviation or its covariance with
the other assets? Explain.
b)
Suppose that the risky premium on the market portfolio is estimated
at 8% with a standard deviation of 22%. What is the risk premium of
a portfolio invested 25% in CEMENCO and 75% in Monrovia Breweries,
if they have Betas of 1.1 and 1.25...

Suppose a bank has $100 million of assets to invest in either
risky or safe investments. The first option is to put all assets in
the safe investment, which will result in a 5% return and yield
$105 one year from now. A second option is to put all the assets in
the risky option, which will result in either a 50% return ($150
million) or a 40% loss ($60 million) with equal probability. A
third option is to split...

The Capital Asset Pricing Model is a financial model that
assumes returns on a portfolio are normally distributed. Suppose a
portfolio has an average annual return of 15.5% (i.e. an average
gain of 15.5%) with a standard deviation of 43%. A return of 0%
means the value of the portfolio doesn't change, a negative return
means that the portfolio loses money, and a positive return means
that the portfolio gains money. Round all answers to 2 decimal
places.
a. What...

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